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CIMA - PAPER P2
Performance Management
Exam Practice Kit
Tutor contact details
Tufal Choudhury
[email protected]
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Paper P2
PERFORMANCE STRATEGY Syllabus overview
While Paper P2 continues the analytic theme of Paper P1 Performance Operations (for example in terms of identifying relevant costs), its main focus is on the application of information in the management processes of decision-making and control, so as to optimise performance. The first two sections deal respectively with the key contributors to operational performance – revenue (decisions of what to produce, at what price) and costs (how to manage them to maximise profitability). The role of control in monitoring and improving performance then comes to the fore in the final two sections, dealing with principles and practices in the use of responsibility centres and budgeting.
Syllabus structure
The syllabus comprises the following topics and study weightings:
Assessment strategy
There will be a written examination paper of three hours, plus 20 minutes of pre-examination question paper reading time. During the 20 minutes you can: read the question paper and annotate or highlight the question paper. However you will not be allowed to: open the answer book; write in the answer book; add any loose sheets/supplements to your answer book; or use calculators. Failure to comply with these rules will be considered as a serious breach of the exam regulations.
A Pricing and Product Decisions 30%
B Cost Planning and Analysis for Competitive Advantage 30%
C Budgeting and management Control 20%
3 | P a g e The examination paper will have the following sections.
Section A 50 marks
Five compulsory medium answer questions, each worth ten marks. Short scenarios may be given, to which some or all
questions relate.
Section B 50 marks One or two compulsory questions. Short scenarios may be given, to which questions relate.
Recommended study hours
Based on a study duration of 3-4 months, we recommend; 1 4 study sessions per week.
2 Each study session 1.5 to 2 hours.
3 Total hours per week between 6 to 8 hours.
The study time per week recommended, should be 80% question practice.
Exam strategy
Within your 20 minutes of official reading time allowed before the exam starts, read through all requirements and information carefully. You can write on the exam paper during this time so concentrate heavy on answer plans for the section A type questions, look at Section B type questions only if you have time. You can write on the exam paper during this time so produce brief outline answer plans and highlight key requirements and scenario information.
You have 1.8 mins per mark (3 hours or 180 mins divided by 100 marks).
Allow 18 minutes per question for the five compulsory questions within section A (total time 90 minutes).
Allow 90 minutes (the remaining time you have) to complete section B.
The examiner has said that it is unlikely section B will ever contain one compulsory question and therefore more likely to contain two compulsory questions worth 25 marks each.
4 | P a g e The section B questions are not just 45 minutes of time per question attempted; you have to break down the 45 minutes of time allotted for each requirement before you begin. This ensures you don’t run out of time and this same principle should also be applied to section A requirements.
Tackle all the easiest parts for numerical calculations and then attempt all the other aspects of the requirement in the time you have. It is crucial that you manage your
time properly in the exam. Don’t be afraid to stop calculating even though your answer
is not complete, otherwise over running will seriously prejudice other marks due to inadequate time and dramatically reduce your chances of passing the exam.
Question requirements
Read them carefully.
Break down each requirement into headings and include and underline these headings within your answer sheet.
Examine any information in the scenario for the question (if provided) constantly to generate ideas to meet the requirements.
Ensure you deal with all aspects to a question requirement.
Always write a brief conclusion (sometimes additional marks are included in the post exam guide if a candidate has does this).
Answer presentation
Page clearly labelled as to what part of the question you are completing
Start a fresh page for every part to a question.
Watch for ‘write a report or memo etc’.
Let the question requirement drive your headings.
Write in brief explanations 5-6 lines then a gap or ‘white space’ every 5-6 lines.
Diagrams should be neat and spacious about 1/3 page in size.
Marks will be balanced according to the weighting of the syllabus.
Discussions
Make the relevant point.
Explain that point in as much detail as possible.
Relate to the scenario.
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Learning objectives
Learning objectives are defined at the back of every CIMA exam on exam day, a copy of the table below will be provided on exam day. Exam requirements will BOLD these
verbs below to help you decide the correct approach to a question. The common learning
verbs include Explain, Discuss, Describe, Identify and Construct. Familiarise yourself with these commonly used verbs.
Knowledge List
State Define
Make a list of
Express, fully or clearly, the details/facts of Give the exact meaning of
Comprehension Describe
Distinguish Explain Identify Illustrate
Communicate the key features of Highlight the differences between Make clear, state the meaning of Recognise, or select after consideration Use an example to describe or explain
Application Apply Calculate/compute Demonstrate Prepare Reconcile Solve Tabulate
Put to practical use Ascertain mathematically
Prove with certainty by practical means Make or get ready for use
Prove consistent/compatible Find an answer to
Arrange in a table
Analysis Analyse
Categorise
Compare and contrast Construct
Discuss Interpret Produce
Examine in detail Place in a defined class
Show the similarities and/or differences between
Build up or compile
Examine in detail by argument Translate into familiar terms Create or bring into existence
Evaluation Advise
Evaluate Recommend
Counsel, inform or notify Appraise or assess the value of Advise on the course of action
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CONTENTS
Section A type questions – 10 marks each
Part A Pricing and Product Decisions
Relevant chapters from study manual 1, 3, 5 and 8
Question number
Title Exam year Question
page number
Answer page number
A1 - 1 EXE (P2) Pilot Paper 13 103
A1 - 2 MNP (P2) May 2005 14 104
A1 – 3 VBJ (P2) May 2005 15 105
A1 – 4 QXY plc (P2) Nov 2006 19 106
A1 - 5 RST (P2) May 2007 19 108
A1 – 6 HS (P2) Nov 2007 20 109
A1 – 7 Bank charges (P2) May 2008 21 112
A1 – 8 WX May 2011 22 113
Section B type questions – 25 marks each
Part A Pricing and Product Decisions
Relevant chapters from study manual 1, 3, 5 and 8
Question number
Title Exam year Question
page number Answer page number A2 – 1 TQ (P2) Pilot Paper 24 117 A2 – 2 QP plc (P2) Nov 2005 25 121 A2 – 3 ZP plc (P2) Nov 2005 27 124 A2 – 4 AVX plc (P2) May 2006 29 127 A2 – 5 GHK (P2) May 2006 31 131 A2 – 6 H (P2) May 2007 33 137 A2 - 7 DFG (P2) Nov 2007 35 139
A2 – 8 Highly skilled workers (P2) May 2008 36 144
A2 – 9 RT May 2010 37 146
A2 – 10 LM Nov 2010 39 151
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Section A type questions – 10 marks each
Part B Cost Planning and Analysis for Competitive Advantage
Relevant chapters from study manual 2, 4 and 6
Question number
Title Exam year Question
page number
Answer page number
B1 – 1 SWAL (P2) Pilot Paper 44 157
B1 – 2 X group (P2) May 2005 44 159
B1 – 3 ML (P2) Nov 2005 45 160
B1 – 4 PK plc (P2) Nov 2005 46 161
B1 – 5 Financial advisors (P2) May 2006 46 163
B1 – 6 Compliance v conformance (P2) May 2006 47 165
B1 – 7 AVN (P2) Nov 2006 47 167
B1 – 8 W (P2) Nov 2006 48 170
B1 – 9 New product (P2) May 2007 49 171
B1 – 10 New small company (P2) Nov 2007 50 172
B1 – 11 XY (P2) May 2008 51 174
B1 – 12 Inventory levels (P2) May 2008 51 175
B1 – 13 Workshop (P2) May 2008 52 177
B1 – 14 Out-turn performace report May 2010 53 178
B1 – 15 PQ May 2010 54 180
B1 - 16 Timber products May 2010 54 181
B1 – 17 LMN May 2010 55 182
B1 – 18 Production manager Nov 2010 56 183
B1 – 19 CAL Nov 2010 57 185
B1 – 20 QW Nov 2010 58 186
B1 – 21 Accountancy services Nov 2010 58 187
B1 – 22 PT May 2011 59 188
B1 – 23 TQM and JIT (P1) Pilot Paper 60 189
B1 - 24 Standard costing (P1) May 2006 60 190
B1 - 25 Marginal v throughput (P1) May 2006 60 191
B1 – 26 MRPS (P1) May 2007 60 191
B1 – 27 JIT (P1) May 2007 60 192
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Section B type questions – 25 marks each
Part B Cost Planning and Analysis for Competitive Advantage
Relevant chapters from study manual 2, 4 and 6
Question number
Title Exam year Question
page number
Answer page number
B2 – 1 The Q organisation (P2) May 2005 62 194
B2 – 2 F plc (P1) May 2005 63 198
B2 – 3 KL (P2) Nov 2006 64 202
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Section A type questions – 10 marks each
Part C Budgeting and management Control
Relevant chapters from study manual 4
Question number
Title Exam year Question
page number
Answer page number
C1 – 1 Solicitors firm May 2010 69 210
C1 - 2 DW Nov 2010 70 211
C1 – 3 JYT May 2011 70 212
C1 – 4 DVD May 2011 71 213
C1 – 5 SFG May 2011 72 215
C1 – 6 Feedback and feedforward (P1) Pilot Paper 72 216
C1 – 7 Profit centre managers (P1) Pilot Paper 72 217
C1 – 8 Balance scorecard (P1) May 2005 73 217
C1 – 9 Particiaption in budgets (P1) May 2005 73 219
C1 – 10 Beyond budgeting (P1) May 2005 73 220
C1 - 11 J Limited (P1) Nov 2005 74 221 C1 – 12 ST plc (P1) Nov 2005 74 222 C1 – 13 W Limited (P1) Nov 2005 74 223 C1 – 14 T plc (P1) May 2006 75 224 C1 - 15 Product M (P1) May 2007 75 225 C1 – 16 QBD (P1) Nov 2007 76 226
C1 - 17 Budgetary planning and control (P1) Nov 2007 77 227
C1 - 18 JIT systems (P1) Nov 2007 77 227
C1 – 19 Feedback and forward (P1) Nov 2007 77 228
C1 – 20 Nursing homes (P1) Nov 2007 77 228
C1 – 21 Participative budgeting (P1) May 2008 78 230
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Section B type questions – 25 marks each
Part C Budgeting and management Control
Relevant chapters from study manual 4
Question number
Title Exam year Question
page number Answer page number C2 – 1 M plc (P1) May 2006 79 232 C2 – 2 RF Ltd (P1) May 2007 80 236 C2 – 3 Trackit (P1) May 2008 82 240 C2 – 4 X plc (P1) Nov 2006 85 244
Section A type questions – 10 marks each
Part D Control and Performance Measurement of Responsibility Centres
Relevant chapters from study manual 9
Question number
Title Exam year Question
page number
Answer page number
D1 – 1 EVA and RI (P1) Pilot Paper 87 248
D1 – 2 Controllability principle (P1) Pilot Paper 87 249
D1 – 3 Transfer pricing (P1) Pilot Paper 87 249
D1 – 4 EVA (P1) May 2005 87 251
D1 – 5 WD, PD & TD (P1) May 2005 87 252
D1 – 6 G group (P1) May 2007 88 254
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Section B type questions – 25 marks each
Part D Control and Performance Measurement of Responsibility Centres
Relevant chapters from study manual 9
Question number
Title Exam year Question
page number Answer page number D2 – 1 Y and Z (P1) Nov 2005 90 257 D2 – 2 FP (P1) May 2006 91 262 D2 – 3 ZZ group (P1) Nov 2006 93 266
D2 – 4 Computer manufacturer (P1) Nov 2007 95 269
D2 – 5 Perfumes and cosmetics May 2010 96 273
D2 – 6 SWZ Nov 2010 99 276
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Mock exams to be submitted
Once all chapters have been completed, four mock exams are to be
attempted under timed conditions and sent to the address Tufal Choudhury,
57 Toms Lane, Kings Langley WD4 8NA. Please ensure you put your name
and address on your mock exam when submitting by post. Alternatively
scanned scripts by e-mail can be sent directly to
[email protected]
You should allow 20 minutes reading time before you begin and then 3
hours maximum to complete each mock exam. Make sure you have a
strategy and plan for how to manage your time.
Mock One
P2 Specimen (2010) exam paper
Mock Two
P2 September 2010 exam paper
Mock Three
P2 March 2011 exam paper
Mock Four
P2 September 2011 exam paper
Mock Five
P2 November 2011 exam paper
The above exam questions and solutions can be downloaded via your
‘mycima’ account which contains access to all past exam papers and
solutions, alternatively contact
[email protected]
if you would like to
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Questions – Section A Part A Pricing and Product Decisions A1 -1 EXE (CIMA P2 Pilot paper 2005)
You have received a request from EXE to provide a quotation for the manufacture of a specialised piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared:
Note $ Direct materials:
Steel 10m2 @ $5.00 per m2 1 50
Brass fittings 2 20
Direct labour:
Skilled 25 hours @ $8.00 per hour 3 200
Semi-skilled 10 hours @ $5.00 per hour 4 50
Overhead 35 hours @ $10.00 per hour 5 350
Estimating time 6 100
770 Administration overhead @ 20% of production cost 7 154 924
Profit @ 25% of total cost 8 231
Selling price 1,155
Notes:
1. 1 The steel is regularly used, and has a current stock value of $5.00 per square metre. There are currently 100 square metres in stock. The steel is readily available at a price of $5.50 per square metre.
2. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of $20 for the fittings required.
3. The skilled labour is currently employed by your company and paid at a rate of $8.00 per hour. If this job were undertaken it would be necessary either to work 25 hours’ overtime, which would be paid at time plus one half, OR in order to carry out the work in normal time, reduce production of another product that earns contribution of $13.00 per hour.
4. The semi-skilled labour currently has sufficient paid idle time to be able to complete this work.
14 | P a g e 5. The overhead absorption rate includes power costs which are directly related to
machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of $0.75 per hour. There are no other overhead costs that can be specifically identified with this job. 6. The cost of the estimating time is that attributed to the four hours taken by the
engineers to analyse the drawings and determine the cost estimate given above. 7. It is company policy to add 20% to the production cost as an allowance for
administration costs associated with the jobs accepted.
This is the standard profit added by your company as part of its pricing policy.
Required:
Prepare on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using EACH of the values in your estimate.
(12 marks)
A1 – 2 MNP (CIMA P2 May 2005)
Z manufactures three joint products (M, N and P) from the same common process. The following process account relates to the common process last month and is typical of the monthly results of operating this process:
Common Process Account Litres $ Litres $
Opening work in process 1,000 5,320 Normal loss 10,000 20,000 Materials 100,000 250,000 Output M 25,000 141,875
Conversion costs: Output N 15,000 85,125
Variable 100,000 Output P 45,000 255,375
Fixed 180,000 Closing WIP 800 3,533
Abnormal loss 5,200 29,412
101,000 535,320 101,000 535,320 Each one of the products can be sold immediately after the common process, but each one of them can be further processed individually before being sold. The following further processing costs and selling prices per litre are expected:
15 | P a g e Product Selling price after Selling price after Further variable
common process further processing processing cost
$/litre $/litre $/litre
M 6·25 8·40 1·75
N 5·20 6·45 0·95
P 6·80 7·45 0·85
Required:
(a) State the method used to apportion the common costs between the products M, N and P and comment on its acceptability. Explain why it is necessary to apportion the common costs between each of the products.
(5 marks)
(b) Evaluate the viability of the common process, and determine the optimal processing plan for each of the three products showing appropriate calculations.
(5 marks)
(Total = 10 marks)
A1 – 3 VBJ (CIMA P2 May 2005)
The CS group is planning its annual marketing conference for its sales executives and has approached the VBJ Holiday company (VBJ) to obtain a quotation.
VBJ has been trying to win the business of the CS group for some time and is keen to provide a quotation which the CS group will find acceptable in the hope that this will lead to future contracts.
The manager of VBJ has produced the following cost estimate for the conference: $
Coach running costs 2,000 Driver costs 3,000 Hotel costs 5,000 General overheads 2,000 Sub total 12,000 Profit (30%) 3,600 Total 15,600
You have considered this cost estimate but you believe that it would be more appropriate to base the quotation on relevant costs. You have therefore obtained the following further information:
16 | P a g e Coach running costs represent the fuel costs of $1,500 plus an apportionment of the annual fixed costs of operating the coach. No specific fixed costs would be incurred if the coach is used on this contract. If the contract did not go ahead, the coach would not be in use for eight out of the ten days of the conference. For the other two days a contract has already been accepted which contains a significant financial penalty clause. This contract earns a contribution of $250 per day. A replacement coach could be hired for $180 per day.
Driver costs represent the salary and related employment costs of one driver for 10 days. If the driver is used on this contract the company will need to replace the driver so that VBJ can complete its existing work. The replacement driver would be hired from a recruitment agency that charges $400 per day for a suitably qualified driver.
Hotel costs are the expected costs of hiring the hotel for the conference.
General overheads are based upon the overhead absorption rate of VBJ and are set annually when the company prepares its budgets. The only general overhead cost that can be specifically identified with the conference is the time that has been spent in considering the costs of the conference and preparing the quotation. This amounted to $250.
Required:
Prepare a statement showing the total relevant cost of the contract. Explain clearly the reasons for each of the values in your quotation and for excluding any of the costs (if appropriate).
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A1 – 4 QXY plc (CIMA P2 Nov 2006)
You are the Assistant Management Accountant of QXY plc, a food manufacturer. The Board of Directors is concerned that its operational managers may not be fully aware of the importance of understanding the costs incurred by the business and the effect that this has on their operational decision making. In addition, the operational managers need to be aware of the implications of their pricing policy when trying to increase the volume of sales.
You are scheduled to make a presentation to the operational managers tomorrow to explain to them the different costs that are incurred by the business, the results of some research that has been conducted into the implications for pricing and the importance of understanding these issues for their decision making. The diagram on the opposite page
has already been prepared for the presentation. Required:
You are required to interpret the diagram and explain how it illustrates issues that the operational managers should consider when making decisions. (Note: your answer mustinclude explanations of the Sales Revenue, Total Cost and Fixed Cost lines, and the significance of each of the activity levels labelled A, B, C, D).
18 | P a g e Diagram showing costs and revenues over a range of activity levels
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A1 – 5 RST (CIMA P2 May 2007)
Z is one of a number of companies that produce three products for an external market. The three products, R, S and T may be bought or sold in this market. The common process account of Z for March 2007 is shown below:
Kg $ Kg $
Inputs:
Material A 1,000 3,500 Normal loss 500 0 Material B 2,000 2,000 Outputs:
Material C 1,500 3,000 Product R 800 3,500
Direct labour 6,000 Product S 2,000 8,750
Variable overhead 2,000 Product T 1,200 5,250
Fixed cost 1,000
Totals 4,500 17,500 4,500 17,500
Z can sell products R, S or T after this common process or they can be individually further processed and sold as RZ, SZ and TZ respectively. The market prices for the products at the intermediate stage and after further processing are:
Market prices per kg: $ R 3.00 S 5.00 T 3.50 RZ 6.00 SZ 5.75 TZ 6.75
The specific costs of the three individual further processes are: Process R to RZ variable cost of $1.40 per kg, no fixed costs Process S to SZ variable cost of $0.90 per kg, no fixed costs
Process T to TZ variable cost of $1.00 per kg, fixed cost of $600 per month
Required:
(a) Produce calculations to determine whether any of the intermediate products should be further processed before being sold. Clearly state your recommendations together with any relevant assumptions that you have made.
20 | P a g e (b) Produce calculations to assess the viability of the common process:
(i) assuming that there is an external market for products R, S and T; and (ii) assuming that there is not an external market for products R, S and T. State clearly your recommendations.
(7 marks)
(Total = 10 marks)
A1 – 6 HS (CIMA P2 Nov 2007)
HS manufactures components for use in computers. The business operates in a highly competitive market where there are a large number of manufacturers of similar components. HS is considering its pricing strategy for the next twelve weeks for one of its components. The Managing Director seeks your advice to determine the selling price that will maximise the profit to be made during this period.
You have been given the following data:
Market Demand
The current selling price of the component is $1,350 and at this price the average weekly demand over the last four weeks has been 8,000 components. An analysis of the market shows that for every $50 increase in selling price the demand reduces by 1,000 components per week. Equally, for every $50 reduction in selling price the demand increases by 1,000 components per week.
Costs
The direct material cost of each component is $270. This price is part of a fixed price contract with the material suppliers and the contract does not expire for another year. Production labour and conversion costs, together with other overhead costs and the corresponding output volumes, have been collected for the last four weeks and they are as follows:
Week Output volume (units) $000
1 9,400 7,000
2 7,600 5,688
3 8,500 6,334
4 7,300 5,446
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Required:
(a) Calculate the optimum (profit maximising) selling price of the component for the period.
Note: If Price = a - bq then Marginal Revenue = a - 2bq
(6 marks)
(b) Identify and explain two reasons why it may be inappropriate for HS to use this theoretical pricing model in practice.
(4 marks)
(Total = 10 marks)
A1 – 7 Bank charges (CIMA P2 May 2008)
A bank is reviewing the bank account it offers to its business customers and the charges it makes for routine transactions (for example paying into the account, writing cheques, making electronic payments and transfers). Currently, the bank’s charges to its business customers are £0⋅60 per routine transaction. The bank pays interest to the customer at 0⋅1% per year on any balance in the account.
According to the bank’s records, there are currently one million business customers. Each customer makes one thousand routine transactions each year; 45% of business customers maintain an average balance of £2,000 in their account. The accounts of the other 55% of business customers are overdrawn with an average overdraft balance of £4,000. Interest on overdrawn accounts is charged at 20% per year.
In addition, the bank has a number of savings account customers which, together with the bank’s business customers, result in a balance of net funds that are invested by the bank and yield an annual return by 3% per year.
The bank is concerned about a growing tendency for its competitors to provide routine transactions free of charge to their business customers. As a result the bank is considering twoaccount options:
Account Option One
An account that charges the business customer a fixed fee of £10 per month, with no further charges for any routine transactions. Interest would be paid to the business customer at 0⋅5% per year on any balances in the account. The bank expects that if it adopts this charging structure, it will increase the number of business customers by 5%from its present level;
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Account Option Two
An account that does not charge the customer for any routine transactions, but pays no interest on any balances in the account. The bank expects that if it adopts this charging structure, this will increase the number of business customers by 10% from its present level.
The bank does not expect the profile of new business customers to be different from existing business customers in terms of the balances in their accounts or the number of routine transactions they make. Interest will continue to be charged at 20% per year on overdrawn accounts. The bank does not expect that either of these options will result in any changes to its existing staffing or other resources.
The bank also expects that if it takes no action and continues with its existing bank account that the number of business customers will fall by 20%.
Required:
(a) Recommend which course of action the bank should take by preparing calculations to show the annual profits from:
(i) continuing with the existing bank account
(ii) each of the two account options described above.
(12 marks)
A1 – 8 WX (CIMA P2 May 2011)
WX is reviewing the selling price of one of its products. The current selling price of the product is $25 per unit and annual demand is forecast to be 150,000 units at this price. Market research indicates that the level of demand would be affected by any change in the selling price. Detailed analysis from this research shows that for every $1 increase in selling price, annual demand would reduce by 25,000 units and that for every $1 decrease in selling price, annual demand would increase by 25,000 units.
A forecast of the annual costs that would be incurred by WX in respect of this product at differing activity levels is as follows:
Annual production (units) 100,000 160,000 200,000 $000 $000 $000 Direct materials 200 320 400 Direct labour 600 960 1,200
23 | P a g e The cost behaviour patterns represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.
Required:
(a)
(i) Calculate the total variable cost per unit.
(2 marks)
(ii) Calculate the selling price of the product that will maximise the company’s profits.
(4 marks)
Note: If Price (P) = a - bx then Marginal Revenue = a - 2bx
(b) Explain TWO reasons why the company might decide NOT to use this optimum selling price.
(4 marks)
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Questions – Section B Part A Pricing and Product Decisions A2-1 TQ (CIMA P2 Pilot Paper 2005)
(a) TQ manufactures and retails second generation mobile (cell) phones. The following details relate to one model of phone:
$/unit Budgeted selling price 60 Budgeted variable cost 25
Budgeted fixed cost 10
Period 1 2 3
Budgeted production and sales (units) 520 590 660
Fixed overhead volume variance $1,200 (A) $1,900 (A) $2,600 (A) There was no change in the level of stock during any of periods 1 to 3.
The Board of Directors had expected sales to keep on growing but, instead, they appeared to have stabilised. This has led to the adverse fixed overhead volume variances. It is now the start of period 4 and the Board of Directors is concerned at the large variances that have occurred during the first three periods of the year. The Sales and Marketing Director has confirmed that the past trend of sales is likely to continue unless changes are made to the selling price of the product. Further analysis of the market for the mobile phone suggests that demand would be zero if the selling price was raised to $100 or more.
Required:
(i) Calculate the price that TQ should have charged for the phone assuming that it wished to maximise the contribution from this product.
Note: If price = a – bx then marginal revenue = a – 2bx
(7 marks)
(ii) Calculate the difference between the contribution that would have been earned at the optimal price and the actual contribution earned during period 3, assuming the variable costs per unit were as budgeted.
25 | P a g e (b) TQ is currently developing a third generation mobile phone. It is a “state of the art” new handheld device that acts as a mobile phone, personal assistant, digital camera (pictures and video), and music player. The Board of Directors seeks your advice as to the pricing strategy that it should adopt for such a product. The company has incurred a significant level of development costs and recognises that the technology for these products is advancing rapidly and that the life cycle for the product is relatively short.
Required:
Prepare a report, addressed to the Board of Directors that discusses the alternative pricing strategies available to TQ.
(15 marks)
(Total = 25 marks)
A2 – 2 QP plc (CIMA P2 Nov 2005)
QP plc is a food processing company that produces pre-prepared meals for sale to consumers through a number of different supermarkets. The company specialises in three particular pre-prepared meals and has invested significantly in modern manufacturing processes to ensure a high quality product. The company is very aware of the importance of training and retaining high quality staff in all areas of the company and, in order to ensure their production employees’ commitment to the company, the employees are guaranteed a weekly salary that is equivalent to their normal working hours paid at their normal hourly rate of £7 per hour.
The meals are produced in batches of 100 units. Costs and selling prices per batch are as follows:
Meal TR PN BE
£/batch £/batch £/batch
Selling Price 340 450 270
Ingredient K (£5/kg) 150 120 90
Ingredient L (£10/kg) 70 90 40
Ingredient M (£15/kg) 30 75 45
Labour (£7/hour) 21 28 42
Factory costs absorbed 20 80 40
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Required:
(a) State the principles of throughput accounting and the effects of using it for short-term decision making.
(6 marks)
(b) QP plc is preparing its production plans for the next three months and has estimated the maximum demand from its customers to be as follows:
TR 500 batches PN 400 batches BE 350 batches
These demand maximums are amended figures because a customer has just delayed its request for a large order and QP has unusually got some spare capacity over the next three months. However, these demand maximums do include a contract for the delivery of 50 batches of each to an important customer. If this minimum contract is not satisfied then QP plc will have to pay a substantial financial penalty for non-delivery.
The Production Director is concerned at hearing news that two of the ingredients used are expected to be in short supply for the next three months. QP plc does not hold inventory of these ingredients and although there are no supply problems for ingredient K, the supplies of ingredients L and M are expected to be limited to:
Ingredient L 7,000 kilos Ingredient M 3,000 kilos
The Production Director has researched the problem and found that ingredient V can be used as a direct substitute for ingredient M. It also costs the same as ingredient M. There is an unlimited supply of ingredient V.
Required:
Prepare calculations to determine the production mix that will maximise the profit of QP plc during the next three months.
(10 marks)
(c) The World Health Organisation has now announced that ingredient V contains dangerously high levels of a chemical that can cause life-threatening illnesses. As a consequence it can no longer be used in the production of food.
27 | P a g e As a result, the production director has determined the optimal solution to the company’sproduction mix problem using linear programming. This is set out below: Objective function value 110,714
TR value 500 PN value 357 BE value 71 TR slack value 0 PN slack value 43 BE slack value 279 L value 3 M value 28 Required:
Explain the meaning of each of the values contained in the above solution.
(9 marks)
(Total = 25 marks)
A2 – 3 ZP plc (CIMA P2 Nov 2007)
ZP plc is a marketing consultancy that provides marketing advice and support to small and medium sized enterprises. ZP plc employs 4 full time marketing consultants who each expect to deliver 1,500 chargeable hours per year and each receive a salary of £60,000 per year. In addition the company employs 6 marketing support/administration staff whose combined total salary cost is £120,000 per year.
ZP plc has estimated its other costs for the coming year as follows: £000 Office premises: rent, rates, heating 50
Advertising 5
Travel to clients 15
Accommodation whilst visiting clients 11 Telephone, fax, communications 10
28 | P a g e ZP plc has been attributing costs to each client (and to the projects undertaken for them) by recording the chargeable hours spent on each client and using a single cost rate of £75 per chargeable hour. The same basis has been used to estimate the costs of a project when preparing a quotation for new work.
ZP plc has reviewed its existing client database and determined the following three average profiles of typical clients:
Client profile D E F
Chargeable hours per client 100 700 300 Distance (miles) to client 50 70 100 Number of visits per client 3 8 3 Number of clients in each profile 10 5 5
The senior consultant has been reviewing the company’s costing and pricing procedures. He suggests that the use of a single cost rate should be abandoned and, where possible, activities should be costed individually. With this is mind he has obtained the following further information:
It is ZP plc’s policy that where a visit is made to a client and the distance to the client is more than 50 miles, the consultant will travel the day before the visit and stay in local accommodation so that the maximum time is available for meeting the client the following day.
The cost of travel to the client is dependent on the number of miles travelled to visit the client.
Other costs are facility costs – at present the senior consultant cannot identify an alternative basis to that currently being used to attribute costs to each client.
Required:
(a) Prepare calculations to show the cost attributed to each client group using an activity based system of attributing costs.
(7 marks)
(b) Discuss the differences between the costs attributed using activity based costing and those attributed by the current system and adviser whether the senior consultant’s suggestion should be adopted.
29 | P a g e (c) In a manufacturing environment activity based costing often classifies activities
into those that are: unit; batch; product sustaining; and facility sustaining. Discuss, giving examples, how similar classifications may be applied to the use of the technique in consultancy organisations such as ZP plc.
(9 marks)
(Total = 25 marks)
A2 – 4 AVX plc (CIMA P2 May 2006)
AVX Plc assembles circuit boards for use by high technology audio video companies. Due to the rapidly advancing technology in this field, AVX Plc is constantly being challenged to learn new techniques.
AVX Plc uses standard costing to control its costs against targets set by senior managers. The standard labour cost per batch of one particular type of circuit board (CB45) is set out below:
£
Direct labour - 50 hours @ £10 /hour 500
The following labour efficiency variances arose during the first six months of the assembly of CB45:
Month Number of batches Labour Efficiency
assembled and sold Variance (£)
November 1 Nil December 1 170.00 Favourable January 2 452.20 Favourable February 4 1,089.30 Favourable March 8 1,711.50 Favourable April 16 3,423.00 Favourable
An investigation has confirmed that all of the costs were as expected except that there was a learning effect in respect of the direct labour that had not been anticipated when the standard cost was set.
Required:
(a)
(i) Calculate the monthly rates of learning that applied during the six months;
(ii) Identify when the learning period ended and briefly discuss the implications of your findings for AVX Plc.
30 | P a g e AVX Plc initially priced each batch of CB45 circuit boards on the basis of its standard cost of £960 plus a mark up of 25%. Recently the company has noticed that, due to increasing competition, it is having difficulty maintaining its sales volume at this price. The Finance Director has agreed that the long run unit variable cost of the CB45 circuit board is £672.72 per batch. She has suggested that the price charged should be based on an analysis of market demand. She has discovered that at a price of £1,200 the demand is 16 batches per month, for every £20 reduction in selling price there is an increase in demand of 1 batch of CB45 circuit boards, and for every £20 increase in selling price there is a reduction in demand of 1 batch.
Required:
(b) Calculate the profit maximising selling price per batch using the data supplied by the Finance Director
(8 marks)
Note: If Price (P) = a-bx then Marginal Revenue (MR) = a-2bx
The Technical Director cannot understand why there is a need to change the selling price. He argues that this is a highly advanced technological product and that AVX Plc should not reduce its price as this reflects badly on the company. If anything is at fault, he argues, it is the use of Standard Costing and he has asked whether Target Costing should be used instead.
Required:
(c)
(i) Explain the difference between standard costs and target costs;
(ii) Explain the possible reasons why AVX Plc needs to re-consider its pricing policy now that the CB45 circuit board has been available in the market for six months.
(7 marks)
31 | P a g e
A2 – 5 GHK (CIMA P2 May 2006)
GHK manufactures four products from different combinations of the same direct materials and direct labour. An extract from the flexible budgets for next quarter for each of these products is as follows :
Product G H J K Units 3,000 5,000 3,000 5,000 3,000 5,000 3,000 5,000 $000 $000 $000 $000 $000 $000 $000 $000 Revenue 30 50 60 100 45 75 90 150 Direct Material A (note 1) 9 15 12 20 4.5 7.5 18 30 Direct Material B (note 2) 6 10 6 10 13.5 22.5 36 60 Direct labour (note 3) 6 10 24 40 22.5 37.5 9 15 Overhead (note 4) 6 8 13 19 11 17 11 17 Notes
1. Material A was purchased some time ago at a cost of $5 per kg. There are 5,000 kgs in inventory. The costs shown in the flexible budget are based on this historical cost. The material is in regular use and currently has a replacement cost of $7 per kg.
2. Material B is purchased as required ; its expected cost is $10 per kg. The costs shown in the flexible budget are based on this expected cost.
3. Direct labour costs are based on an hourly rate of $10 per hour. Employees work the number of hours necessary to meet production requirements.
4. Overhead costs of each product include a specific fixed cost of $1,000 per quarter which would be avoided if the product was to be discontinued. Other fixed overhead costs are apportioned between the products but are not affected by the mix of products manufactured.
GHK has been advised by the only supplier of material B that the quantity of material B that will be available during the next quarter will be limited to 5,000 kgs. Accordingly the company is being forced to reconsider its production plan for the next quarter. GHK has already entered into contracts to supply one of its major customers with the following : 500 units of product G
1,600 units of product H 800 units of product J 400 units of product K
32 | P a g e Apart from this, the demand expected from other customers is expected to be
3,600 units of product G 3,000 units of product H 3,000 units of product J 4,000 units of product K
The major customer will not accept partial delivery of the contract and if the contract with this major customer is not completed in full, then GHK will have to pay a financial penalty of $5,000.
Required :
(a) For each of the four products, calculate the relevant contribution per $ of material B for the next quarter.
(6 marks)
(b) It has been determined that the optimum production plan based on the data above is to produce 4,100 units of product G, 4600 units of product H, 800 units of product J, and 2,417 units of product K. Determine the amount of financial penalty at which GHK would be indifferent between meeting the contract or paying the penalty.
(5 marks)
(c) Calculate the relevant contribution to sales ratios for each of the four products.
(2 marks)
(d) Assuming that the limiting factor restrictions no longer apply, prepare a sketch of a multi product profit volume chart by ranking the products according to your contribution to sales ratio calculations based on total market demand. Your sketch should plot the products using the highest contribution to sales ratio first.
(6 marks)
(e) Explain briefly, stating any relevant assumptions and limitations, how the multi product profit volume chart that you prepared in (d) above may be used by the manager of GHK to understand the relationships between costs, volume and profit within the business.
(6 marks)
33 | P a g e
A2 – 6 H (CIMA P2 May 2007)
H, a printing company, uses traditional absorption costing to report its monthly profits. It is seeking to increase its business by winning work from new customers. It now has theopportunity to prepare a quotation for a large organisation that currently requires a new catalogue of its services.
A technical report on the resource requirements for the catalogues has been completed at a cost of $1,000 and its details are summarised below:
Production period
It is expected that the total time required to print and despatch the catalogue will be one week.
Material A
10,000 sheets of special printing paper will be required. This is a paper that is in regular use by H and the company has 3,400 sheets in inventory. These originally cost $1.40 per sheet but the current market price is $1•50 per sheet. The resale price of the sheets held in inventory is $1.20 per sheet.
Material B
This is a special ink that H will need to purchase at a cost of $8 per litre. 200 litres will be required for this catalogue but the supplier has a minimum order size of 250 litres. H does not foresee any other use for this ink, but will hold the surplus in inventory. H’s inventory policy is to review slow moving items regularly. The cost of any inventory item that has not been used for more than 6 months is accounted for as an expense of the period in which that review occurs.
Direct labour
Sufficient people are already employed by H to print the catalogue, but some of the printing will require overtime working due to the availability of a particular machine that is used on other work. The employees are normally paid $8 per hour, the order will require 150 hours of work and 50 of these hours will be in excess of the employees’ normal working week. A rate of $10 per hour is paid for these overtime hours. Employees are paid using an hourly rate with a guaranteed minimum wage for their normal working week.
Supervision
An existing supervisor will take responsibility for the catalogue in addition to her existing duties. She is not currently fully employed and receives a salary of $500 per week.
34 | P a g e
Machinery
Two different types of machine will be required:
Machine A will print the catalogues. This is expected to take 20 hours of machine time. The running cost of machine A is $5 per hour. There is currently 30 hours of unused time on machine A per week that is being sold to other printers for $12 per hour.
Machine B will be used to cut and bind the catalogues. This machine is being used to full capacity in the normal working week and this is why there is a need to work overtime. The catalogue will require 25 machine hours and these have a running cost of $4 per hour.
Despatch
There will be a delivery cost of $400 to transport the catalogues to the customer.
Fixed overhead costs
H uses a traditional absorption costing system to attribute fixed overhead costs to its work. The absorption rate that it uses is $20 per direct labour hour.
Profit mark-up
H applies a 30% mark-up to its costs to determine its selling prices.
Required:
(a) In order to assist the management of H in preparing its quotation, prepare a schedule showing the relevant costs for the production of the catalogues. State clearly your reason for including or excluding each value that has been provided in the above scenario.
(15 marks)
(b) Explain how the use of relevant costs as the basis of setting a selling price may be appropriate for short-term pricing decisions but may be inappropriatefor long-term pricing decisions. Your answer should also discuss the conflict between reporting profitability within a traditional absorption costing system and the use of relevant cost based pricing.
(10 marks)
35 | P a g e
A2 – 7 DFG (CIMA P2 Nov 2007)
DFG manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:
Product D £/unit G £/unit
Selling price 115 120
Direct material A (£5 per kg) 20 10
Direct material B (£3 per kg) 12 24
Skilled labour (£7 per hour) 28 21
Variable overhead (£2 per machine hour) 14 18
Fixed overhead* 28 36
Profit 13 11
*Fixed overhead is absorbed using an absorption rate per machine hour. It is an unavoidable central overhead cost that is not affected by the mix or volume of products produced.
The maximum weekly demand for products D and G is 400 units and 450 units respectively and this is the normal weekly production volume achieved by DFG. However, for the next four weeks the achievable production level will be reduced due to a shortage of available resources. The resources that are expected to be available are as follows:
Direct material A 1,800kg Direct material B 3,500kg Skilled labour 2,500 hours
Machine time 6,500 machine hours
Required:
(a) Using graphical linear programming identify the weekly production schedule for products D and G that maximises the profits of DFG during the next four weeks.
(15 marks)
(b) The optimal solution to part (a) shows that the shadow prices of Skilled labour and Direct material A are as follows:
Skilled labour £Nil Direct material A £5.82
Explain the relevance of these values to the management of DFG.
36 | P a g e (c) Using the graph you have drawn in part (a) explain how you would calculate by how much the selling price of Product D could rise before the optimal solution would change. Note: Assume that demand is not affected by the selling price. You are not required to perform any calculations.
(4 marks)
(Total = 25 marks)
A2 – 8 Highly skilled workers (CIMA P2 May 2008)
An engineering company manufactures a number of products and components, using a team of highly skilled workers and a variety of different metals.
The current supplier has announced that the amount of M1, one of the materials it currently supplies, will be limited to 1,000 square metres in total for the next three-month period because there will be insufficient M1 to satisfy demand.
The only items manufactured using M1 and their production costs and selling prices (where applicable) are shown below:
Product Product Component Component
P4 P6 C3 C5
$/unit $/unit $/unit $/unit
Selling price 125 175 n/a n/a
Direct materials: M1 * 15 10 5 10 M2 10 20 15 20 Direct labour 20 30 16 10 Variable overhead 10 15 8 5 Fixed overhead ** 20 30 16 10 Total cost 75 105 60 55
* Material M1 is expected to be limited in supply during the next three months. These costs are based on M1 continuing to be available at a price of $20 per square metre. ** Fixed overhead is absorbed on the basis of direct labour cost.
Products P4 and P6 are sold externally. Components C3 and C5 are used in other products made by the company. These other products do not require any further amounts of material M1.
37 | P a g e The estimated total demand for these products and components during the next three months is as follows:
P4 2,000 units P6 1,500 units C3 500 units C5 1,000 units
Components C3 and C5 are essential components. They would have to be bought in if they could not be made internally. They can be purchased from external suppliers for $75 and $95 per unit respectively. The bought in components are of the same quality as those manufactured by the company. The products they are used in have sufficient margins to remain financially worthwhile if C3 and C5 are bought in at these prices.
Required:
(a) Prepare calculations to show the most profitable course of action for the company for the next three months, assuming that there are no other suppliers of material M1, and advise the company on THREE other factors that it should consider before making its decision.
(14 marks)
(b) Calculate the maximum prices that the company should pay to obtain further supplies of material M1 from an alternative supplier, and the quantities of material M1 to which each of these prices apply.
(6 marks)
The company has now become aware of a contract that it has already accepted, for the immediate delivery of 500 units of P4 at a selling price of $125 per unit. This contract has a financial penalty clause for non-delivery. This contract is in addition to the 2,000 units of estimated demand for P4 stated previously. Assume that there is no alternative supplier of material M1.
(c) Calculate the minimum financial penalty that would change your recommendation.
(5 marks)
(Total = 25 marks)
A2 – 9 RT (CIMA P2 May 2010)
RT produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:
38 | P a g e
Product R T
Unit selling price ($) 130 160
Resources per unit:
Direct labour ($8 per hour) 3 hours 5 hours
Material A ($3 per kg) 5 kgs 4 kgs
Material B ($7 per litre) 2 litres 1 litre
Machine hours ($10 per hour) 3 hours 4 hours
Market research shows that the maximum demand for products R and T during June 2010 is 500 units and 800 units respectively. This does not include an order that RT has agreed with a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of $100 and $135 per unit respectively. Although the customer will accept part of the order, failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000 financial penalty.
At a recent meeting of the purchasing and production managers to discuss the production plans of RT for June, the following resource restrictions for June were identified:
Direct labour hours 7,500 hours
Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours
Required:
(a) Assuming that RT completes the order with the commercial customer, prepare calculations to show, from a financial perspective, the optimum production plan for June 2010 and the contribution that would result from adopting this plan.
(6 marks)
(b) Prepare calculations to show, from a financial perspective, whether RT should complete the order from the commercial customer
(3 marks)
You have now presented your optimum production plan to the purchasing and production managers of RT. During your presentation it became clear that the predicted resource restrictions were rather optimistic. In fact the managers agreed that the availability of all of the resources could be as much as 10% lower than their original predictions.
39 | P a g e (c) Assuming that RT completes the order with the commercial customer, andusing graphical linear programming, prepare a graph to show the optimum production plan for RT for June 2010 on the basis that the availability of all resources is 10% lower than originally predicted.
(11 marks)
(d) Discuss how the graph in your solution to (c) above can be used to help to determine the optimum production plan for June 2010 if the actual resource availability lies somewhere between the managers’ optimistic and pessimistic predictions.
(5 marks)
(Total = 25 marks)
A2 – 10 LM (CIMA P2 Nov 2010)
LM produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of these two products are as follows:
Product L M
Unit selling price ($) 70 90
Variable costs per unit:
Direct labour ($7 per hour) 28 14 Direct material ($5 per kg) 10 45 Machine hours ($10 per hour) 10 20
Fixed overheads absorbed 12 6
Profit per unit 10 5
Fixed overheads are absorbed at the rate of $3 per direct labour hour.
Market research shows that the maximum demand for products L and M during December 2010 will be 400 units and 700 units respectively.
At a recent meeting of the purchasing and production managers to discuss the company’s production plans for December 2010, the following resource availability for December 2010 was identified:
Direct labour 3,500 hours Direct material 6,000 kg Machine hours 2,000 hours
40 | P a g e
Required:
(a) Prepare calculations to show, from a financial perspective, the optimum production plan for December 2010 and the contribution that would result from adopting your plan.
(6 marks)
(b) You have now presented your optimum plan to the purchasing and production managers of LM. During the presentation, the following additional information became available:
(i) The company has agreed to an order for 250 units of product M for a selling price of $90 per unit from a new overseas customer. This order is in addition to the maximum demand that was previously predicted and must be produced and delivered in December 2010;
(ii) The originally predicted resource restrictions were optimistic. The managers now agree that the availability of all resources will be 20% lower than their original predictions.
Required:
Construct the revised resource constraints and the objective function to be used to
identify, given the additional information above, the revised optimum production plan for December 2010.
(6 marks)
(c) The resource constraints and objective function requested in part (b) above have now been processed in a simplex linear programming model and the following solution has been printed:
Product L 400 Product L other value 0
Product M 194 Product M other value 506
Direct labour 312 Direct material ($) 1.22
Machine hours 312
Contribution ($) 10,934.00 Required:
Analyse the meaning of each of the above eight values in the solution to the problem.
Your answer should include a proof of the five individual values highlighted in bold.
(13 marks)
41 | P a g e
A2 – 11 Hotel (CIMA P2 May 2011)
The management of a hotel is planning for the next year. The hotel has 100 bedrooms. The price of a room night includes breakfast for the guests. Other services (a snack service and a bar and restaurant) are available but are not included in the price of the room night. These additional services are provided to hotel guests only.
For planning purposes the hotel divides the year (based on 360 days) into three seasons: peak, mid and low.
Details of the hotel and its services and forecasts for the next year are given below.
1. Seasons, room charges, room occupancy, guests per room and room revenue
The hotel charges a price per room per night (including breakfast) irrespective of the number of guests per room. The price charged is different in each of the seasons.
Season Peak Mid Low
Number of days 90 120 150
Price charged per room per night ($) 100.00 80.00 55.00
Hotel room occupancy % 95 75 50
Average number of guests per room 1.8 1.5 1.2 Total room revenue ($) 855,000 720,000 412,500
2. Guest related costs
The hotel incurs some costs, including providing breakfast, that are directly related to the number of guests in the hotel. These are $12 per guest per night in all seasons.
3. Room related costs
The hotel incurs some costs that are directly related to the number of rooms occupied. These include cleaning and laundry costs of $5 per occupied room per night regardless of season. There are also power and lighting costs of $3 in the peak season, $4 in the mid season and $6 in the low season per occupied room per night.
4. Hot snacks
The hotel offers a 24 hour hot snacks service to the guests. Past records show that this service has been used by 30% of its guests in the mid and low seasons but only 10% in the
peak season. It is forecast that the average spend per guest per night will be $10. The hotel earns a 30% gross contribution from this income.
The hotel employs a cook on a salary of $20,000 per year to provide this service. All of the costs for the hot snacks service, except for the cook’s salary, are variable. The cook could be made redundant with no redundancy costs.
42 | P a g e
5. Restaurant & Bar
Past records show that the usage of the restaurant and bar is seasonal. The restaurant and bar are particularly popular with the hotel’s business guests. The forecast usage is shown below.
Season Daily demand
Peak 30% of hotel guests spend an average of $15 each Mid 50% of hotel guests spend an average of $20 each Low 70% of hotel guests spend an average of $30 each
The hotel earns a 25% gross contribution from this income and employs two chefs on a combined salary of $54,000 per year to provide this facility. All of the costs in the restaurant and bar, except for the salaries of the chefs, are variable.
The two chefs could be made redundant with no redundancy costs.
6. General hotel costs.
These include the costs of reception staff, the heating and lighting of the common areas and other facility related costs. The forecast costs for next year are:
Peak season $300,000 Mid season $400,000 Low season $500,000
These costs could be reduced by 75% if the hotel were to close temporarily for one or more seasons of the year.
There are also some costs that are incurred by the hotel and can only be avoided by its permanent closure. These are estimated to $200,000 for next year.
Required:
(a) Prepare, in an appropriate format, a columnar statement that will help the managers of the hotel to plan for next year. Your statement should show the hotel’s activities by season and in total.
(18 marks)
(b)
(i) Identify, based on your statement, the actions that the managers could take to maximise the profit of the hotel for next year.
43 | P a g e (ii) Explain TWO factors that the managers should consider before implementing the actions you identified in (b)(i).
(4 marks)
44 | P a g e
Questions – Section A Part B Cost Planning and Analysis for Competitive Advantage B1 – 1 SWAL (CIMA P2 Pilot paper 2005)
SW is a member of the SWAL Group of companies. SW manufactures cleaning liquid using chemicals that it buys from a number of suppliers. In the past SW has used a periodic review stock control system with maximum, minimum and re-order levels to control the purchase of the chemicals and the economic order quantity model to minimise its costs.
The Managing Director of SW is considering a change by introducing a Just in Time (JIT) system.
Required:
As Management Accountant, prepare a report to the Managing Director that explains how a JIT system differs from the system presently being used and the extent to which its introduction would require a review of SW’s quality control procedures.
(10 marks)
B1 – 2 X group (CIMA P2 May 2005)
The X group is a well-established manufacturing group that operates a number of companies using similar production and inventory holding policies. All of the companies are in the same country though there are considerable distances between them.
The group has traditionally operated a constant production system whereby the same volume of output is produced each week, even though the demand for the group’s products is subject to seasonal fluctuations. As a result there is always finished goods inventory in the group’s warehouses waiting for customer orders. This inventory will include a safety inventory equal to two weeks’ production.
Raw material inventories are ordered from suppliers using the Economic Order Quantity (EOQ) model in conjunction with a computerised inventory control system which identifies the need to place an order when the re-order level is reached. The purchasing department is centralised for the group. On receiving a notification from the computerised inventory control system that an order is to be placed, a series of quotation enquiries are issued to prospective suppliers so that the best price and delivery terms are obtained for each order. This practice has resulted in there being a large number of suppliers to the X group. Each supplier delivers directly to the company that requires the material.
